What does the Interest Coverage Ratio (ICR) measure?

The Interest Coverage Ratio (ICR) is a vital tool used by lenders to determine the affordability of a Buy-to-Let (BTL) mortgage. It assesses the relationship between the rental income a property generates and the mortgage interest payments required.

The ICR is calculated by dividing the annual rental income by the annual mortgage interest payments. For example, an ICR of 125% means the rental income is 1.25 times greater than the interest payments. Lenders typically require a minimum ICR, often ranging from 125% to 145%, depending on factors like the borrower's tax bracket and the specific mortgage product.

A higher ICR indicates a greater cushion for covering mortgage payments, even with potential interest rate increases or unexpected expenses. Borrowers should aim to maximize their ICR by increasing rental income or reducing mortgage interest payments to improve their chances of securing a BTL mortgage.